Deciding on the best payment method for you is a common question we handle as legal locum recruiters, and there are three methods to choose from.
Below we discuss these payment methods and considerations for each.
Sole-Trader (Self Employed)
Operating on a self-employed basis is very straightforward. This process is simply creating an invoice of your hours each week for the client, with details of the days and hours you have worked, your bank account details and the payment schedule.
You will be responsible for registering as a sole trader, keeping a record of your invoices, and completing a self-assessment for HMRC each year.
If you’re self-employed, your business will have various running costs. You can deduct some of these costs to work out your taxable profit, as long as they’re allowable expenses.
Typically, payment terms of three working days are acceptable for most law firms.
This is a very popular payment method for many locums that we partner with. As a Sole-Trader, you do not need a third party in the administration of your finances, there are no IR35 complexities, and your communication will be directly with the law firm with whom you are working.
Limited Company
Many locums choose to set up their own Limited Company for their locum work. This is a more complex route with advantages and disadvantages, some of which are as follows.
Liability:
Firstly, as a sole trader, you and your business are considered one legal entity. This means that you benefit from all the profits but also take on all the liabilities. If something went wrong, you are personally liable for your business debts. It also means there can only be one owner of the business.
On the other hand, a limited company is a separate legal entity from its director(s). The owners are not responsible for any business liabilities, and their personal assets are not tied to the company. That means that shareholders and directors cannot be pursued personally for any debts the company runs up. Typically as a locum there is just one owner, but having multiple owners and shareholders is possible.
Taxation:
A second key difference is how you get paid and what tax you pay. A sole trader pays income tax on all their business profits. If you have a particularly successful year, you’ll pay more tax.
A limited company has more flexibility as you can choose to draw a regular salary, which is taxed as normal income, and you can also earn dividends, which are taxed at a lower rate. You don’t have to take all the profits out of the business in the year they are earned, so you can make sure you’re drawing money tax efficiently. However, you will pay corporation tax on annual profits.
Similarly, to being a Sole Trader, you can also expense legitimate costs such as insurance, professional costs and travel expenses. You may also have to register for VAT if your turnover exceeds the VAT threshold (link).
IR35:
IR35, or the ‘off-working payroll rules’, are another key consideration if going down the Limited company route, particularly in the legal locum world.
For every contractor operating through a limited company, each contract must be given an IR35 status of either “inside” or “outside” of IR35. In another post, we talk about navigating IR35 here.
Notably, who is responsible for making this decision, and the liability should an investigation find the decision incorrect, is determined by the size of the company.
If a company is deemed small by HMRC standards, the firm is deemed exempt from this liability and the IR35 status decision, and the liability sit directly with the Limited company. If large by HMRC standards, the liability sits with the law firm itself and therefore they will decide the IR35 status.
If the position is deemed ‘inside’ of IR35, the limited company is essentially considered a ‘disguised employee’ and therefore tax is paid as a PAYE worker. Income tax and National Insurance Contributions (NICs) must be deducted at source, before payment is made to the Limited company. This can reduce net income by up to 25%.
From a size perspective, we find that a large percentage of locum contracts are with law firms that are deemed ‘small’ for IR35 purposes. Typically, firms over the threshold have less of a requirement for interims, with many having teams big enough to cover workload internally.
As a locum, running a Limited company and the resulting IR35 complexities may limit the firms you can or would want to work with.
Importantly if operating in this way, it is imperative to enquire about the IR35 status ahead of beginning any work.
Complexity
The final consideration between operating Limited and as a Sole Trader is complexity.
Becoming a sole trader is easy. There’s limited paperwork and you simply create invoices, record expenses and fill out a self-assessment form each year.
A limited company must be registered as a business, with fees and legalities attached. You will need to keep company records, file company tax returns each year, and complete your own personal self-assessment form. You will likely pay a combination of salary and dividends, therefore will also need to pay employer national insurance contributions.
For all of these reasons, it’s strongly recommended that you employ the services of an accountant if going down the Limited company route.
Umbrella Company
Umbrella companies typically act as an employer to contractors. This is known as umbrella PAYE.
If you wish to operate a Limited company, most can also act as Accountants and aid with the set up and on-going financial administration of running a Limited company. As contractor specialists, many interims choose this route, rather than using a high-street accountant.
Providing you choose a compliant (often FCSA accredited) umbrella company; you’ll be paid in accordance with UK tax law and HMRC regulations. If operating umbrella PAYE, you will have the same employment rights as a PAYE employee.
Once signed up, which typically takes less than 15 minutes, there is minimal administration. All you need to do is complete timesheets which are approved by your manager.
They handle taxation, expenses and National Insurance Contributions on your behalf, removing any need for your own financial administration.
In exchange for using their service, umbrella companies will deduct a margin from your gross pay each time they process your pay (gross means it’s taken before tax – costing you a little less). Most umbrellas will have a margin between £15 and £30. This fee may be different if using an umbrella company as an Accountant for your Limited company.
If you’re operating umbrella PAYE, your IR35 status is irrelevant because you’ll be taxed like a permanent employee.
If operating umbrella PAYE, there are additional benefits such as continuity of employment which will help when applying for a mortgage or credit, employee benefits such as sick pay and maternity pay (as they become your employer), pensions and other perks.
At Spirehouse, we operate a Preferred Supplier List of trusted, FSCA approved umbrella companies.
Keep in Mind
Ensure you have agreed payment terms with the agency or end client, particularly if you are invoicing directly.
We recommend keeping a record of time spent on files and hours worked each week, ready for your invoice.
Note, you don’t need to include time spent on files on your invoice, but it can help if you need to refer back.
Invoice promptly, but not before you have finished working the week you are invoicing for
Consistent formatting of invoices and invoice numbers help. Please ask us if you would like an invoice template.
If you would like any further information or to discuss your next locum role, please contact us directly.
Please also contact us for an invoice template or to be put in touch with an FSCA accredited umbrella company.
Luke Grant
0121 798 0498
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